Sebi red-flags delays in launches by AIFs: Regulator to issue guidelines
By Ashley Coutinho
The Securities and Exchange Board of India (Sebi) has expressed its displeasure over inordinate delays in scheme launches of alternative investment funds (AIFs).
The first close is typically declared when the fund wants to go live with its first set of investors after collecting a good initial corpus.
“The AIF industry is growing rapidly and the regulations surrounding it are being updated constantly. All these 300-plus schemes were able to bypass the newer regulations and stringent requirements for fund registration that have come into play in the last year or two, which is a bit concerning,” an industry official said.
The regulator may allow three months to a scheme for onboarding distributors and marketing the scheme. It may allow the fund another 12 months to do its first close.
Closure of a fund gets delayed when the investment manager is not being able to get capital commitments from the (limited partners) LPs in time, or due to protracted commercial negotiations between the fund manager and the LPs. Industry observers, however, believe that these delays should not exceed two years.
“Initially, most LPs only provide a soft commitment to the fund manager, which undergoes changes or is even withdrawn due to market conditions or other such factors. At times, the fund manager sets up the investment vehicle on the basis of soft commitment received from a few potential LPs, and thereafter if they are unable to get further commitments, the fund closure is delayed,” Hemang Parekh, partner at DSK Legal, said.
According to Pallabi Ghosal, partner at Trilegal, fund managers apply for registrations in advance so that they are not stuck with commitments raised from investors and no registration in sight. Sebi typically takes three-six months to grant registrations and managers are worried about investors reneging on their commitments during this period.
“Today, there is no standard definition of a launch. Fund managers might say that they have been marketing the fund for three years but have not been able to get any money. Some AIFs may take a registration and do nothing, waiting indefinitely for an appropriate time to hit the market. From Sebi’s perspective, this is not a desirable practice,” the official quoted above said.
However, an initial close may also not happen if the strategy is no longer attractive, the organisation does not support the fund, an optimal size is not achieved or key team members are not in place to run the fund, Ghosal added.
An email sent to Sebi did not immediately get a response.
Other products in the market do have a finite launch period once they get registered with Sebi or get the regulatory nod. For example, Sebi approval or observations for companies that file offer documents for their initial public offerings is typically valid for a year. Once this period lapses, the offer document has to be refiled.
“The regulator’s thought process seems to be that if the fundraising process is delayed beyond a reasonable period of 15-18 months, the fund manager should update the information memorandum and renew the Sebi approval, which will ensure that full disclosures regarding the delay in fundraising and/or any commercial changes are disclosed to the potential LPs,” Parekh said.
Sebi has increased its oversight on AIFs in the past few months, given the pace of growth clocked by the industry.
AIF commitments have grown 42% year-on-year to Rs 6.94 trillion as of June 30, 2022, data from Sebi show. The amount invested has risen 43% to Rs 3.1 trillion and the number of AIFs is inching towards the 1,000-mark.
